>More Optimistic About Growth
>
>We have become more optimistic about the US economic outlook. Financial
>conditions have become much more accommodative over the past few months.
>For example, the Goldman Sachs Financial Conditions Index has eased by
>nearly 2 percentage points since March. As a result, we are raising our GDP
>growth forecast significantly over the next four quarters (see table below).
>
>This forecast change does not reflect a change in the framework that we have
>used in recent years, which has made us consistently more pessimistic about
>the growth outlook (and more optimistic about the interest rate outlook)
>than the consensus. We still believe that financial conditions are the way
>to think about monetary policy and that the stock market bubble has provoked
>balance sheet adjustments that have acted to restrain economic activity.
>We continue to believe that these balance sheet adjustments are not over
>yet. We are not throwing in the towel in our way of thinking about the US
>economy.
>
>What has changed are financial conditions. Moreover, we are more confident
>that this improvement is sustainable. What's important here is the shift in
>the Fed's regime--to focus on keeping short-term rates low for a sustained
>period in order to prevent deflation. On the balance sheet adjustment side
>of equation, we still view this as a constraint. But, in the near-term
>easier financial conditions and fiscal stimulus should dominate.
>
>Although this forecast change brings our 2004 view much closer to the
>consensus, it is important to recognize that the below-trend view has been
>the right view for the last couple of years whereas the consensus view that
>growth would revert to trend in whatever quarter was next has not been. We
>think that now is the time to embrace that view given the recent and
>prospective changes in financial conditions and fiscal policy, respectively.
>Our view also departs importantly from the consensus beginning in the second
>half of 2004. Once the stimulus from tax policy subsides, the economy is
>likely to downshift to a slower growth pace. Termites are still munching
>away in the basement!